Why Adidas Could Be Particularly Hard-Hit By Coronavirus Store Closures

Adidas is shoring up its liquidity to weather the challenges of COVID-19-related store closures, but some analysts say the company likely has a rough period ahead of it nonetheless.

In a note to investors Friday, Credit Suisse analysts led by Simon Irwin warned that the German sportswear giant could see ramifications beyond near-term sales losses from shuttered European and North American locations. Between Adidas and its wholesale partners, excess inventory resulting from the widespread closures could reach 1.6 billion euro ($1.74 billion), they said, leading to write-downs and squeezed margins.

“The antiquated structure of wholesale distribution, notably in Europe, may result in bad debts and poor price discipline as failing retailers focus on cash collection,” wrote the Credit Suisse analysts, adding that selling off the excess inventory could take as much as a year.

“Adidas sources very little product on less than a 6 month lead time, and some is nearer a year,” they wrote, expressing concern about the lack of flexibility built into this model. FN has reached out to Adidas for comment.

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Adidas ended 2019 with inventories up significantly over the prior year — 4.09 billion euros ($4.45 billion) versus 3.45 billion euros ($3.75 billion) in 2018 — which it attributed to the earlier timing of Chinese New Year in 2020. While the company said it saw strong sales in China in the first three weeks of the year, its revenues during the period between Chinese New Year and the end of February dropped 80% year-over-year amid the country’s coronavirus lockdowns.

Sales in China have begun to pick up across much of the retail sector, but Credit Suisse estimates it will take three months for business to return to 90% of pre-closure levels once stores reopen.

The investment bank lowered its rating of Adidas to “underperform” from “neutral” and cut its 12-month price target to 199 euros ($216.44) from 230 euros ($215.10), favoring rival Nike for its continued momentum even amid current challenges.

Despite these headwinds, other analysts have expressed confidence in Adidas’ overall financial position. Following the company’s announcement Tuesday that it had been approved for a syndicated loan facility worth 3 billion euros ($3.28 billion), Morningstar Research Services equity analyst David Swartz told FN that the move isn’t a cause for alarm in the current environment.

“Their finances were fine. They just did this as a precaution. If the loans are available and are extremely low interest — or any interest at all at this point — it makes sense to take them,” he said. “That doesn’t mean that they’re in any distress or that they were worried they’re going to run out of cash or anything like that.”

As part of the terms of the syndicated loan, Adidas has agreed to suspend dividend payments for the duration of the facility. The company also ended fiscal 2019 with 2.2 billion euros ($2.39 billion) in cash and cash equivalents and 292 million euros ($317.8 million) in short-term financial assets, putting it in a stronger position than most retailers today.

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